What’s the Best Way to Pay Down Credit Cards?

Dear BFF,

For people who have multiple credit cards to pay off, the best way to pay them down depends on what works best for you and your personal situation. While there is no wrong way to pay down debt, two methods often recommended are the "debt avalanche" method and the "debt snowball" method.

The Debt Avalanche Method

The debt avalanche method is where you pick the credit card with the highest interest rate and focus on paying that one off first while continuing to make the minimum monthly payments due on your other cards. Because the debt with the highest interest rate will cost you the most in interest fees in the long run, paying that one off first makes the most sense financially. It also frees up the most money to put toward other bills once you have paid it off, which means you can speed up the rate at which you are paying down debt as you go along, saving you even more on interest over time.

If you are looking for the most economical option, the debt avalanche method is likely the best option for you, although sometimes the amount saved might not be too much more than you'll save with the debt snowball method.

The downside of this method is that it can be challenging to stick to. When there is a high interest rate and a high balance, it can take time for the balance to begin to shrink significantly. That's especially true if you can only put a small amount more than the minimum due toward the balance each month.

The avalanche method will save you money in the long term, but only if you can stick with it. If you get discouraged and give up before paying off the debt, it doesn't matter that it's the most sound financial choice. Other options might help you stay motivated and so could be a better choice.

The Debt Snowball Method

Another well-known method for paying off credit card debt is the debt snowball method. With the snowball method, you focus on paying down the card with the smallest balance first, regardless of the interest rate. Continue to make at least the minimum payment due on your other accounts until the first account is paid off. Once the balance is zero, move on to the account with the next smallest balance, and so on. With each account that is paid off, you can add the amount you were putting towards that debt each month to the next account in line.

Although the snowball method may not be the most efficient financially, it can make the most sense psychologically. For some, paying off accounts more rapidly helps build momentum and provide the motivation to keep at it. The hard part can be resisting the temptation to use the cards you've paid off—but it's critical to making the process worth it.

Keeping Your Credit Cards Open Is Best for Scores

Regardless of the method you choose to pay off credit cards, keeping your paid-off accounts open is generally best for credit scores. Credit utilization is the second most important factor in credit scores. Your credit utilization rate is calculated by taking the total of all your credit card balances and dividing that number by the total of all your credit limits, then multiplying by 100 to get your utilization percentage. When you close an account, you lose that available credit, making your total balance on revolving accounts a greater percentage of your overall available credit.

It's also a good idea to keep the accounts active by using them periodically to make small purchases and then paying off the balance in full right away. By using the accounts but not carrying a balance, you are showing potential lenders that you know how to manage credit responsibly, and you won't get caught accumulating debt or paying unnecessary interest on your purchases.

Although keeping your paid-off credit card accounts is usually best for credit scores, consider your own unique situation when making this decision. If you have struggled with credit card debt and feel that leaving accounts open may be too much of a temptation to overspend, closing them might be the safest and best option for you.

The math says paying off the highest interest rate cards first is always the best choice. But, if seeing progress faster keeps you going, and emotionally committed, the snowball method might get better results. In the end, the best method is the one that works for you.

Thanks for asking.

Jennifer White, Consumer Education Specialist

This question came from a recent Periscope session we hosted.